7 times when it's OK to cancel a credit card

Whether you tell a joke or cancel a credit card, timing is everything

By Erin Peterson | Published: January 16, 2009

You've had a good run, you and your credit card. It's been there for you during good times and bad, buying you dinners, gifts and that trip to Cabo. But all good things come to an end, and for whatever reason, you're ready to part ways.

If it's really the end, be sure you have the timing right. Pick the wrong time to cancel a card and you could damage your credit score -- and the rest of your financial life.

1. You're not going to be getting a loan any time soon. If you're hoping to finance a car, home or college tuition sometime soon, your credit score will help determine your loan terms. And your credit score will be dinged if you cancel a card and lower your available credit. While it won't do permanent damage, you'll want to have a few months' buffer between canceling and applying for a loan, says Kimberly Lankford, a contributing editor at Kiplinger's Personal Finance magazine. "If you still want to do some housecleaning and close out some cards, don't do it all at once," she says. "Close them one of a time, and wait a few months between canceling them. You definitely don't want a lot of action on your credit report all at once."

2. You have plenty of other offers in the mail. One quick way to see if your credit is still in reasonably good shape and you won't have future credit problems if you cancel a card: Your mailbox. "If your mailbox doesn't still contain offers for credit cards, then you are not a candidate for new credit," says Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling. "You better hang on to what you've got."

3. Your balances are at zero, or close to it. If you're someone who uses credit cards only in an emergency, or very sparingly, dropping a card (as long as you have more than one), should have very little impact. Your credit score is affected by your utilization ratio -- that is, the amount of credit you're using in a given month compared to the amount available. If you can keep that ratio low even after you cancel the card, you'll be in good shape, says Lankford. "We recommend trying to keep that overall utilization ratio at 30 percent of your available limit, and 20 percent is even better."

4. You plan on staying put. If you have a stable job and housing situation, you don't have to worry as much about the potential impact of canceling a credit card, says Scott Crawford, CEO and co-founder of DebtGoal.com. You won't be walking across credit score tripwires. "Employers may look at your credit score when you're applying for a job, and landlords look at it for prospective renters," he says. "If you're in a position where you might be moving or looking for a new job -- a real possibility these days -- you want to protect that score."

5. You're likely to give into retail temptation. Sure, it's wise to keep open those lines of credit, but if having a credit card means you'll max it out, it's best to look at the big picture. "If you're running up big bills, it doesn't matter if you've got two cards or 20," says Michael Eisenberg, principal at Eisenberg Financial Advisors in the Washington, D.C., area and a member of the American Institute of Certified Public Accountants' National Financial Literacy Commission. "If you're only paying the minimums, you're throwing money away. It's more important to get in control of your finances than to worry about taking a hit on your credit report." Cancel the cards -- and give your finances the first aid they need.

6. Your card company has changed terms -- and won't negotiate. The tough economy is causing many credit card companies to lower credit limits and jack up interest rates. If you're feeling the pinch, call them and ask them if you can return to your old terms. If not, it may be a good time to cut the cord. "If they say no, you can tell them you'd like to decline the term changes and close the account," says Cunningham. "You'll continue to pay out your balance under the old terms. You won't have charging privileges, and the account will be closed once you've paid it off, but you can keep those old terms -- if you want to play hardball."

7. You want to simplify your finances. Sometimes, less really is more, says Crawford. "If you've got a dozen active credit cards and you're playing the balance transfer game, you probably can't manage it, and you may be increasing your debt without knowing it," he says. "For situations like that, creating a simple, transparent view of your finances -- and that might mean just three or four cards -- can be really advantageous. Canceling your cards and taking that slight hit on your credit score may be worth it."

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